Terra’s Native Token Luna Collapse Was Devastating | Reasons behind Luna Crash and What to Expect

Terra’s Native Token Luna Collapse Was Devastating

The dramatic collapse of Terra's native token Luna, previously ranked among the top 10 most valued cryptocurrencies, has wreaked havoc on the lives of investors who feared becoming homeless due to the crypto chaos.

The crypto-economy has been volatile recently, with billions leaving the market searching for safety, according to CoinMarketCap. LUNA concerns triggered a massive sell-off, with Terra's native digital asset losing 99% against the US dollar in 48 hours. Terrausd (UST) has fallen 67% below the $1 parity, exposing significant issues with its stablecoin UST and native token LUNA as investors lose faith in Terra's long-term sustainability.

What are Luna Terra and UST?

Terra's native token, LUNA, has lost 99.3% in 48 hours, while UST has lost 67%.
Binance, the famous cryptocurrency exchange, temporarily suspended Terra withdrawals.

The events had wrecked the Terra blockchain ecosystem in recent days when the network's algorithmic stablecoin Terrausd (UST) began to lose its US dollar peg.

The Luna Foundation Guard (LFG) and project founder Do Kwon also revealed that the team was lending $1.5 billion in bitcoin (BTC) and Terrausd (UST) to protect the peg. The attempt was unsuccessful, as UST fell below $0.66 per coin before climbing back over the $0.90 mark for most of the day on Tuesday and then dropped again to $0.37 on Thursday evening.

The native token LUNA has fallen massively more than UST in the last few days. Furthermore, when Do Kwon stated that a strategy was in the works, the Terra co-founder addressed the public on Twitter: "Before anything else, the only road ahead will be to absorb the stablecoin supply that wants to depart before UST can start to repeg.”

The Terra co-founder said: “We will propose several practical actions to assist the peg mechanism in absorbing supplies. First, we will support community proposal 1164, which increases the basepool and decreases the PoolRecoveryBlock from 36 to 18. This would expand Terra's minting capacity from $293 million to almost $1200 million.”

Kwon also stated that Terra may recover from the collapse and that the project will not be abandoned. "Terra's return to rising again will be a sight to behold," Kwon tweeted. "We're here to stay, and we will continue to make noise."

Within the previous few days, its market cap has plunged from more than $40 billion to barely $500 million, a collapse of more than 99%, leaving investors nowhere to go.

A Terra investor commented on the Reddit community forum: ”I lost my whole life savings. I had purchased Luna for $85, and I don't know what to do.”

The Real Reason Why Did Luna Crash?

Terra has reached its lowest price level in more than a year. Its eventual failure was unavoidable after being exposed to fundamental issues with its UST stablecoin and fully integrating UST and LUNA to deliver exceptionally high staking rewards to LUNA holders. Terra's algorithms for stabilizing the value of its stablecoin have proven to be manipulative, resulting in a large-scale investment outflow from the LUNA sector. Terra is now ranked 69th in the market, but it was ranked among the Top-10 cryptocurrencies for several months before the crash.

Terra's crash is making headlines and sparking discussions on social media. Crypto enthusiasts are deeply concerned about the recent huge market collapse of one of the supposedly reliable crypto projects. According to blockchain analytics firm Santiment, LUNA has achieved an all-time high in negative sentiment on social media. At the same time, the total prevalence of Terra-related discussions has reached 10% of all crypto discussions, showing a significant crypto community debate about the consequences of LUNA's collapse. Most investors and traders are still pessimistic about Terra's future market potential. While such methods increased the demand for LUNA in the short term, their long-term sustainability was compromised. 

According to Larry Cermak, the Luna Foundation's $1 billion financing plan has failed. This is because the Foundation could not raise the necessary finances to fund its objectives. Furthermore, the panic showed the significant limits of the stablecoin mechanism. After the UST lost parity with the US dollar, Terra's management decided to sell its entire BTC holdings. As a result, stablecoin lost a significant portion of its cryptocurrency backing. The absence of effective blockchain services provided by LUNA led to the collapse of this token's demand.

What Will Happen After This Collapse?

Terra's collapse has many huge consequences for LUNA, the algorithmic stablecoin market, and the entire crypto economy. Terra is unlikely to reclaim its Top-10 position (in terms of both its UST stablecoin and native token LUNA) since it will be unable to maintain its previous unsustainable market expansion plan. Moreover, the damaged reputation may provide a significant barrier to obtaining new investors. The most likely scenario is that investors will soon transition to more reliable crypto projects.

In the short term, at least, algorithmic stablecoins may face extra challenges before rising again. However, if companies rely on long-term algorithms (such as DAI's approach to stablecoins), businesses may adapt to meet the demand for their services despite short-term volatility. As a result, the segment of algorithmic stablecoins can be updated in response to high user concerns. At the same time, the most long-lasting stablecoins should be able to overcome these challenges.

In terms of the general evolution of the crypto industry, the current trend of fast expansion of various types of stablecoins may change. Investors and holders may identify their risks and do not consider them risk-free investments. Additionally, they may become more skeptical of their collateral or methods for ensuring price stability. In the short term, public demand for cryptocurrencies may fall slightly. When current risks are reviewed, investors may begin to enter the market, resulting in quick recovery in the coming months.

It's worth mentioning that UST has already lost and recovered its peg in the past. However, this massive drop in the price of UST may cause investors to lose trust in Terra for some time. It remains to be determined how much of the permanent damage is versus the temporary. These discussions are expected to continue until UST regains its peg.

Terra's Luna Foundation Guard has announced that it will lend $750 million in Bitcoin to over-the-counter firms to help protect the UST peg, as well as lend $750 million in UST to buy Bitcoin as part of its stabilization efforts. These actions look to be driving UST higher and may be effective. However, investors considering Terra are still at high risk.

The way Terra's creator, Do Kwon, and the Luna Foundation Guard handle this situation will decide how well this token performs in the long run. These might be the most important days of Terra's destiny. Investors should keep a keen eye on how UST performs in the following days and weeks; it might be a rough journey.

If LUNA and UST do not recover, no one will TRUST any Crypto projects, including BTC, since this project was one of the greatest thus. Because if Terra can experience such a drastic drop in value, what’s stopping other similar coins from doing the same? What occurred in UST can happen in all stablecoins, including USDT, USDC, and BUSD, and eventually, no one will trust crypto anymore.

Considering all of the facts, and for Luna to recover, they will need to address the problem and show clearly that such a crash will never happen again. In my opinion, I expect to see a bump in Luna prices after the UST peg is recovered. I also hope that the prices will start recovering after the Terra project shows that similar problems will not happen in the future.